Guy Cranswick

In the technology industry, Apple, Google and Amazon are seen as synonymous with innovation. These and other tech-led companies disrupted prevailing business processes and changed the way people use music, buy products, write documents and work. What these corporations have done with their design, software tools and e-commerce initiatives around the world is indeed dynamic. Innovation has been at the centre of their success and with it has come development and growth.

Are companies like Apple nurturing, or stifling, innovation? Photo: Reuters

Looking below the technology, however, there is another view. The business strategies used by these brands actually point to them being less innovative, less dynamic and even innovation-stifling in their rent-seeking methods.

Rent-seeking is the act of increasing the share of existing wealth, rather than creating new wealth. This is most often done by spending resources – and using the legal system – to gain a greater share of existing wealth. Rent-seeking is not rent from tenants, which is the use of a property for a period of time. It is the economic rent a company might earn from an advantage in the market without any further cost of production.

The key thing is that a rent-seeker relies on a stock of wealth, and, to an extent, gaming the system to take a larger share.

Innovation is not an element in accessing greater wealth, and may be a disguise, as for example in finance, where sometimes innovative financial products enable rent-seeking by institutions.

Advertisement

The current dispute between the taxi industry and the developers of the taxi app GoCatch is an example of rent-seeking. The taxi industry is the rent-seeker, in effect deploying barriers to the innovators of the new app. The industry offers good grounds in the dispute, but the protection of existing interests tends to illustrate rent-seeking in opposition to competitive innovation.

As technology users, we are so inured to these battles that we do not see them for what they are: a means to close off competition and lock in products for long-term economic gain.

Rent-seeking is the alternative to competition and wealth creation. It is expensive for consumers and to society as it inhibits innovation and adds layers of costs to product development.

Separating the technology from the business of the brands makes rent-seeking clearer. There are tribal allegiances to the big consumer tech brands and what they represent. Some users become developers and see the potential for success and fortune through the ecosystem of apps that brands sell – albeit at large percentages to themselves as the enabler of the transaction. The terms of business between developers and brands are accepted, even seen as benefit as the developer leverages the big brand's credibility. The big brand is a rent-seeker in the equation.

Rent-seeking is not unlawful or unethical; it’s quite common. It’s motivated by a desire to ensure viability and durability. However, societies and economies are not served by single interests.

Clarity on the role of Google, Apple and others is necessary, because they are quite often seen as part of the means to an innovative, smart economy.

While it’s good to see a teenager sell their app on an app store and then be bought out for millions, this is not a viable policy for an economy. It’s a flip-and-sell financial model. When we finally acknowledge that leading technology brands use rent-seeking strategies for their own objectives, we will need a new set of mechanisms to nurture excellence in the technology industry.

This new direction will only come from wider coordination. Just as jurisdictions are talking more on transfer-pricing, so policymakers need to assess the role of the tech giants in enabling competition and wealth creation.

Along the way they must deal with patents, because the behemoths are still going to be paying attorneys to maintain the status quo. For NSW consumers the settlement between the taxi industry and GoCatch may provide guidance as to how innovation and entrepreneurship will be managed.

We all enjoy the products and services brought to us by technology vendors, but we should not be pinning our futures with them to enhance our prospects.